Fragile Recovery In The Cards For Spain

Recovery will be slow and fragile

Large-scale fiscal consolidation under way

Rebalancing the economy, creating new jobs is key challenge

And while Spain’s banks largely stayed away from the toxic assets that caused so many problems elsewhere in the world during the global economic crisis, the bursting property bubble has raised fresh concerns about non-performing loans related to the construction sector.

The government announced an austerity package in May that included cuts to public sector pay, and has also passed measures to reform the country’s savings banks and dysfunctional labor market. Other structural reforms are under discussion, including pension reform.

In this interview, James Daniel, IMF mission chief for Spain, reflects on the findings of the IMF’s recently completed analysis of the economy.

IMF Survey online: Will the austerity plan approved by the government be enough to restore confidence and put the public finances on a sound footing?

Daniel: The measures approved by the government are bold and the deficit targets are entirely appropriate. Let’s remember that Spain’s debt ratio is low compared with many other countries in Europe. And once the 3 percent deficit target is achieved, we expect public debt to start falling. If the measures are complemented by longer-term reforms such as reform of the pension system, this will put Spain’s public finances on a sustainable path.

IMF Survey online: The Spanish government recently approved a reform of the labor market. Is it focused on the right measures and does it go far enough?

Daniel: The measures definitely go in the right direction and address the right issues. Spain’s Achilles’ heel is in many ways its labor market. If the country is to successfully adjust its economy and make the best use of its resources, the labor market has to work. And Spain’s labor market really stands out in Europe as not providing the right service to its country. Nobody can be happy with an unemployment rate of 20 percent. About a third of those who are employed are only in temporary contracts, and close to half of all Spanish youth are unable to find any jobs at all. The social cost is very high, and from an economic perspective, it is a waste of human capital.

The IMF has emphasized two areas that need reform, namely the wage-setting process and the excessive protection of permanent employees, and these are the two major areas that the government is now addressing. We think the...